Science vs the Art of Risk Management

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Science vs the Art of Risk Management

Eisinger-tmagArticleJesse Eisinger, a reporter of Times partner ProPublica, recently sat down with John Breit, former head of market risk insight for Merrill Lynch, to discuss whether the human factor is being lost in risk management.  Data analytics and the hype around Big Data has become the central focus for finding value and improving risk management.  John Breit, a physicist by training was part of the early wave of “quants” to leave academia, government and the military to work on Wall Street.

Breit soon became disillusioned with his role when he realized the limits of building financial risk models and the focus shifted to become a glorified hall monitor for the trading desk. John now believes that risk managers should “develop what spies call humint — human intelligence from flesh and blood sources. They need to build networks of people who will trust them enough to report when things seem off, before they become spectacular problems. Mr. Breit, who attributes this approach to his mentor, Daniel Napoli, the former head of risk at Merrill Lynch, took people out drinking to get them to open up. He cultivated junior accountants.”

A focus on data alone may be misleading.  Cars are designed with windshields for seeing the road and the risks that jump out in front of you as you drive.  The dashboard serves as an indicator of other variables that may impact the condition of the vehicle such as gas level, driving speed, and outside temperature.

Breit’s lesson is that risk managers have been squeezed into a box.  “Regulators have reduced risk managers to box checkers, making sure they take every measure of risk and report it dutifully on extensive forms. It just consumes more and more staff, turning them into accountants and rotting brains.”

The promise of data analytics is still evolving and risk managers have an opportunity to lead by creating context for data analysis however there is the real possibility that risk management may be further marginalized as a result of a purely data driven mindset.

Jesse Eisinger is a reporter for ProPublica, an independent, nonprofit newsroom that produces investigative journalism in the public interest. Email: jesse@propublica.org. Twitter: @Eisingerj

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